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In Search of Real Rigidities

In: NBER Macroeconomics Annual 2010, Volume 25

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  • Gita Gopinath
  • Oleg Itskhoki

Abstract

The closed and open economy literatures work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that consistent with the presence of real rigidities the response of reset-price inflation to exchange rate shocks depicts significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time aggregate reset-price inflation for imports, like that for consumer prices, depicts little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted as opposed to bilateral exchange rate shocks. We quantitatively evaluate sticky price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence.
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Suggested Citation

  • Gita Gopinath & Oleg Itskhoki, 2011. "In Search of Real Rigidities," NBER Chapters,in: NBER Macroeconomics Annual 2010, Volume 25, pages 261-309 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:12033
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    References listed on IDEAS

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    Cited by:

    1. Marco Bonomo & Marcelo Medeiros & Arnildo Correa, 2011. "Estimating Strategic Complementarity in a State-Dependent Pricing Model," 2011 Meeting Papers 691, Society for Economic Dynamics.
    2. Miguel Casares & Luca Deidda & Jose E. Galdon-Sanchez, 2013. "Business cycle and monetary policy analysis with market rigidities and financial frictions," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 1304, Departamento de Economía - Universidad Pública de Navarra.
    3. Han, Jun & Liu, Runjuan & Ural Marchand, Beyza & Zhang, Junsen, 2016. "Market structure, imperfect tariff pass-through, and household welfare in Urban China," Journal of International Economics, Elsevier, vol. 100(C), pages 220-232.
    4. repec:eee:ecolet:v:156:y:2017:i:c:p:129-132 is not listed on IDEAS
    5. Sandip Mitra & Dilip Mookherjee & Maximo Torero & Sujata Visaria, 2018. "Asymmetric Information and Middleman Margins: An Experiment with Indian Potato Farmers," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 1-13, March.
    6. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
    7. Raphael A. Auer, 2015. "Exchange Rate Pass‐Through, Domestic Competition, and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1617-1650, December.
    8. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    9. Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
    10. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.
    11. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
    12. David Rezza Baqaee & Emmanuel Farhi, 2017. "Productivity and Misallocation in General Equilibrium," NBER Working Papers 24007, National Bureau of Economic Research, Inc.
    13. Goldberg, Linda S. & Tille, Cédric, 2016. "Micro, macro, and strategic forces in international trade invoicing: Synthesis and novel patterns," Journal of International Economics, Elsevier, vol. 102(C), pages 173-187.
    14. Mirko Abbritti, 2012. "Product Market Frictions, Bargaining and Pass-Through," Faculty Working Papers 19/12, School of Economics and Business Administration, University of Navarra.
    15. Camila Casas & Federico J. Díez & Gita Gopinath & Pierre-Olivier Gourinchas, 2016. "Dominant Currency Paradigm," NBER Working Papers 22943, National Bureau of Economic Research, Inc.
    16. repec:hrv:faseco:30780147 is not listed on IDEAS
    17. LG Deidda & J.E. Galdon-Sanchez & M. Casares, 2016. "Loan production and monetary policy," Working Paper CRENoS 201612, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    18. Cao, Shutao & Dong, Wei & Tomlin, Ben, 2015. "Pricing-to-market, currency invoicing and exchange rate pass-through to producer prices," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 128-149.
    19. Mirko Abbritti & Tommaso Trani, 2014. "Search and Bargaining in the Product Market and Price Rigidities," Faculty Working Papers 09/14, School of Economics and Business Administration, University of Navarra.
    20. Pennings, Steven, 2017. "Pass-through of competitors' exchange rates to US import and producer prices," Journal of International Economics, Elsevier, vol. 105(C), pages 41-56.
    21. Razafindrabe, Tovonony M., 2016. "A multi-country DSGE model with incomplete exchange rate pass-through: An application for the Euro-area," Economic Modelling, Elsevier, vol. 52(PA), pages 78-100.
    22. Burstein, Ariel & Gopinath, Gita, 2014. "International Prices and Exchange Rates," Handbook of International Economics, Elsevier.
    23. Emi Nakamura & Jón Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 133-163, May.
    24. Peter J. Klenow & Jonathan L. Willis, 2016. "Real Rigidities and Nominal Price Changes," Economica, London School of Economics and Political Science, vol. 83(331), pages 443-472, July.
    25. Gita Gopinath, 2015. "The International Price System," NBER Working Papers 21646, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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